Thursday, October 29, 2009

Economist's Notebook: Just Who is Getting the Home Buyer Credit?

Economists always talk about how a tax never stays where you put it. If you tax producers or consumers makes no difference, in the end prices adjust and the tax is shared the same way in either case.

But the same can be said of a credit. The government is giving new home buyers $8000 for purchasing a home, but its it the buyers who are actually getting it? The recent Case-Shiller numbers suggest that a lot of this money is actually going to sellers. It makes sense, if you are a potential buyer and you suddenly have an additional $8000, you are probably willing to pay close to $8000 extra for a home. To try and ensure you get the home you want, you are likely to bid up the price close to that $8000. So call it a home buyer credit if you will, in the end it is more like a home seller subsidy.

That said, it does not make much difference from a public policy perspective. The point of the policy was to get homes selling again and put a floor underneath home values to staunch the bleeding going on in the real estate market and all evidence suggests it has been very successful.

But with the winter season approaching and unemployment still high, it appears that this credit is probably going to need to be extended until spring.

By the way, for econ students a quiz: what determines how a tax is shared among buyers and sellers, and how do you think it relates to the housing market?

1 comment:

Maybe it doesn't make much different from a policy perspective and maybe boosting prices to the seller makes sense in some undervalued markets, but by most accounts (e.g. IHS Global Insight), (urban) Oregon is not one of those places. Instead the credit is pushing up prices in a market where they should still be sinking, which only serves to displace or prevent lower income people from owning, and prolongs the reckoning.

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